Depending on how a mortgage loan is handled, lenders can be categorized as those engaging in correspondent lending, wholesale lending, direct lending, and more, each with distinct approaches.
Correspondent lenders originate loans based on correspondent investor guidelines and then sell the loans to those investors, or government-sponsored enterprises (GSE), shortly after closing.
Correspondent investors, or buyers, purchase those “whole loans” on Loan Trading platforms, which typically include the mortgage and its associated servicing rights. Alternatively, correspondents can sell to GSEs through a variety of execution options including servicing release, servicing retained, securitization, etc.
Table of Contents:
What is Correspondent Lending?
Correspondent mortgage lending happens when lenders use their capital to originate, fund, and close mortgages, then sell the loans quickly after closing to correspondent buyers such as banks, government-sponsored enterprises (GSEs), mortgage aggregators, or investors.
These loans are sold quickly because waiting for a payoff ties up capital, which limits a lender’s ability to issue new loans. Selling closed loans to correspondent investors allows them to recoup the funds to continue lending.
Correspondent lenders can make fee revenue on the loans that they originate, as well as a margin on the sale of the loan. They may also retain servicing and earn servicing fees.
What is an Example of a Correspondent Lender?
Correspondent lenders, or correspondent sellers, are typically small to midsize independent mortgage bankers, community banks, credit unions, or non-bank lenders that offer competitive loan products and who usually don’t retain the whole loan in their portfolio.
What’s the Difference Between a Mortgage Broker and Correspondent Lending?
A correspondent lender manages the entire mortgage origination process, including taking the borrower’s application, underwriting the loan, and funding the loan directly.
A mortgage broker collects the borrower’s application and documentation but focuses on finding the best loan terms available based on various qualifications. Once the broker identifies a lender match, the lender handles key steps such as underwriting and funding the loan and, if they’re a correspondent lender, facilitating the sale of the loan on the secondary market.
Mortgage brokers often grow into correspondent lenders when they reach sufficient scale, because of the operational benefits, control over the borrower experience, and increased profitability associated with correspondent lending.
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Wholesale vs. Correspondent Lending
Wholesale and correspondent lending models differ primarily in their relationship with the borrower and management of the upfront lending process.
Wholesale lenders don’t work directly with borrowers; they provide loan products to third-party mortgage brokers who then originate loans on their behalf.
Wholesale lenders generate revenue through a spread over rate offered to the broker, revenue from sale to investors, and servicing fees if they retain the servicing rights.
Wholesale lenders often transition to correspondent investing as they expand their operations. This shift provides greater control, enhanced profitability, and a broader market reach.
How Does Correspondent Lending Benefit Homebuyers?
Correspondent lenders benefit consumers by offering competitive mortgage options and streamlined processing.
Unlike mortgage brokers, they work directly with borrowers deeper into the origination process, which can reduce associated fees. Because there’s no third party involved and correspondents have more control over the loan process, borrowers benefit from potentially fewer costs with more transparency.
- Diverse Loan Products: Correspondent lenders provide diverse loan products because they follow major investor guidelines, which gives borrowers access to competitive rates and flexible terms.
- Faster Closings: In-house underwriting, approval, and funding may allow faster loan processing for borrowers.
- Localized Expertise: Many correspondent sellers are regional lenders who offer personalized customer service accompanied by an understanding of their local housing market.
Correspondent lenders offer regional service while delivering the product variety and efficiency of larger institutions, ensuring competitive loan options for borrowers.
How Correspondent Lenders Can Attract More Investors
Building strong relationships with investors is key to a correspondent lender’s success. To stand out, lenders must consistently deliver high-quality loans that meet investor criteria with seamless operations including:
- Quality underwriting and processing systems.
- Low rejection rates.
- Effective risk management.
- Offering a range of loan products.
- Staying compliant with regulations.
- Using efficient technology that integrates with investor systems.
A track record of financial stability, strong loan performance, and low repurchase rates further enhance a lender’s attractiveness. By focusing on these factors, correspondent lenders can build trust and foster long-term partnerships with investors.
Learn more about reviewing and optimizing your investor set.
Discover the largest Loan Trading Exchange for the U.S. secondary market
Strategies to Grow as a Correspondent Lender
Correspondent lenders must adopt strategies that improve efficiency, profitability, and long-term stability to succeed.
These strategies help lenders adapt to market fluctuations, meet investor requirements, and grow their business by optimizing operations and relationships with investors. In turn, this allows correspondents to offer competitive rates and products to consumers.
1. Moving from Non-Delegated to Delegated Underwriting
The underwrite is arguably the riskiest part of the loan origination process. If it’s done poorly, the originator could produce unsellable loans which can impact the financial health of the firm.
Originators may choose to operate the non-delegated route early in their lifecycle and outsource the underwrite. Or perhaps they originate newer products such as jumbo loans, non-QM loans, and renovation loans non-delegated because they don’t have the appropriate in-house expertise to underwrite themselves.
Non-delegated comes at a cost, though.
Investors offering non-delegated options will charge the originator for the underwrite. It also leaves the originator with less control and logistical process challenges that come with integrating a third party into the origination process.
To move from non-delegated to delegated, the lender will need to have the appropriate, experienced staff and solid quality control processes and policies in place.
2. Moving to Mandatory Loan Sale Delivery
Correspondent lenders can lock loans on a best effort or mandatory basis with the intended end investor. A correspondent lender may choose to lock best efforts at the time of the consumer rate lock if they do not have the experience or in-house expertise to hedge their interest rate risk.
Best effort locks must follow the end investor’s rate lock policies and be managed within that specific investor’s portal, both of which present efficiency challenges.
Correspondent lenders who lock loans on a mandatory basis are instead hedging their interest rate risk between locking with the consumer and time of loan sale. Mandatory pricing is typically stronger than best effort pricing for this reason, referred to as the Mandatory-Best Efforts spread. Using this strategy allows the correspondent to create their own internal rate lock policies and procedures, adding efficiency and consistency to the rate lock process.
Manage loan pipeline risk, conduct electronic TBA trading, and optimize profit
By moving to mandatory loan sale delivery, correspondent lenders can better control the pricing of their loans, reduce the risk of fallout, provide more reliable execution, and remain competitive in a fluctuating market.
Mandatory loan sales with pipeline hedging also give lenders more reliable execution, as they can maintain a broader set of correspondent buyers and increased fungibility for their loans, insulating them from changes in appetite and price from any one investor.
To support this, hedging strategies are often employed, such as using derivative products like TBAs, forward sales, or options, which allow lenders to mitigate and balance against market volatility. This approach not only secures margins but also helps lenders remain competitive in a fluctuating market.
3. Expanding & Optimizing Investor Set
Regularly reviewing investor relationships ensures access to the best loan pricing while factoring in product guidelines, operational efficiencies, and market conditions. Beyond just selecting the highest bid, lenders must assess factors such as the length of time from delivery to purchase, success rates, and the competitiveness of product offerings.
Building strong relationships with investors, understanding their product preferences, and leveraging data-driven analytics can help lenders secure better pricing and improve execution. A diversified investor base reduces risk, enhances operational flexibility, and ensures lenders can adapt to market shifts.
While adding new investors requires an upfront investment in time and resources, the long-term benefits, such as improved pricing, smoother transactions, and greater scalability, make it worthwhile as a strategy for correspondent lenders to scale.
To optimize correspondent pricing while building market share, receive top-level investor recommendations with MCT’s Mortgage Lender Analytics.
4. Retaining Mortgage Servicing Rights
Mortgage Servicing Rights (MSRs) can be sold or retained on the secondary mortgage market. By keeping these rights, correspondent lenders sacrifice the immediate cash gain from selling the asset to generate ongoing monthly servicing income and retain a valuable asset that can be sold to investors or leveraged for liquidity.
When correspondent lenders hold MSRs instead of selling them, they benefit from a stable stream of revenue through servicing fees, often leading to greater financial stability.
As interest rates rise, MSRs can become more valuable as fewer loans are locked, offering lenders the potential for stable revenue. However, retaining servicing rights requires maintaining a strong operational infrastructure to manage servicing effectively, including technology systems for loan tracking and compliance.
5. Increasing Warehouse Line Limits
Warehouse lines offer short-term funding for lenders, enabling them to finance loans before selling them to investors. A higher warehouse line limit allows lenders to fund more loans simultaneously, which helps them meet increased demand.
By negotiating higher limits with warehouse lenders, correspondent lenders can gain greater flexibility, manage larger loan volumes, secure more favorable pricing, and boost profitability. Increasing warehouse lines also helps lenders better manage cash flow and reduces reliance on additional capital.
Note that increased warehouse line limits require careful management to ensure timely repayment and minimize financing expenses. Additionally, lenders can be penalized for non-usage of warehouse lines. So there is a balance.
Final Thoughts
Correspondent mortgage lending is a model where lenders originate, fund, and close home loans using their own capital before selling them to investors. This process allows lenders to maintain liquidity, offer competitive loan products, and efficiently serve borrowers.
To scale successfully, correspondent lenders must optimize investor relationships and adopt risk management strategies like hedging, and mandatory loan sale delivery.
Contact us to get started with correspondent lending.
